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The huge Democratic bet on 'bricks and butter'

July 20, 2021. Summarized by summa-bot.

Compression ratio: 25.7%. 3 min read.

US President Joe Biden speaks with Heather Zaccagnini (R), Applied Technology Department Co-Chair, and college president Dr. Clint Gabbard (L) during a tour of a manufacturing lab at McHenry County College in Crystal Lake, Illinois, on July 7, 2021, as he travels to promote his economic plans. (Photo by SAUL LOEB / AFP) (Photo by SAUL LOEB/AFP via Getty Images)

The spending proposals that Senate Democrats plan to begin advancing this week amount to a massive gamble that the party can simultaneously advance two of its longest-standing economic goals without generating a political backlash or overheating the economy.

In some ways, the Democrats' bet that they can simultaneously turbocharge public investment and strengthen the safety net amounts to a modern equivalent of Johnson's famous gamble during the 1960s that he could afford both "guns and butter," funding the Vietnam War even as he substantially increased domestic spending through his "Great Society" agenda.

The new public investments -- the bricks -- reflect the widespread Democratic belief that over time the economy will grow more quickly and more equitably with a strategy of greater spending in areas such as infrastructure, education and scientific research than behind the competing Republican approach centered on reducing taxes.

The cumulative price tag for the new proposal means Democrats are wagering that the promise of faster growth and more financial security can sell Americans on a federal government that both spends and taxes more as a share of the overall economy than it has at almost any point in its peacetime history, according to federal figures.

Over that period, public investment -- defined primarily as federal spending on infrastructure, education and training, and support for research and development -- has declined, while the safety net -- including such payments to individuals as Social Security, Medicare, Medicaid, food assistance and various tax credits for families -- has soared.

The exact distribution between public investment and safety net spending in the Democratic plans isn't known, because the party hasn't released details on the funding levels in the $3. 5 trillion budget blueprint that Senate Budget Committee Democrats recently agreed on.

At roughly that level, with the added spending on hard infrastructure from the bipartisan plan added in, he projects the Biden proposal would fund a durable increase in public investment equal to about 1 percentage point of the economy, far more than either Bill Clinton or Obama, the last two Democratic presidents, achieved.

In fact, Bivens says, the Democratic proposals would represent a net increase in new public investment probably unmatched since the late 1950s, when the nation built the interstate highway system that facilitated a massive move to the suburbs and also poured billions into education and scientific research after Russia took the lead in the space race by launching its Sputnik satellite.

The blueprint released by Senate Budget Committee Democrats would create new hearing, dental and vision benefits under Medicare (which the Congressional Budget Office has previously estimated could cost around $35 billion annually); extend the expanded child tax credit included in Biden's Covid rescue plan (at a cost that's been projected to reach at least $100 billion annually); create a new paid family leave program, significantly expand financial help for child care and broaden the Earned Income Tax Credit (programs that have been projected to cost about $65 billion annually as Biden proposed them); increase care options for seniors and children; and pour billions more into health care through increased subsidies for those purchasing insurance through the ACA and a plan to extend coverage to eligible adults in the handful of remaining states that have refused to expand Medicaid under the law.

With the Democratic plans proposing such panoramic increases in both public investment and the safety net, the inevitable result is to substantially increase government spending as a share of the economy.

Holtz-Eakin generally supports the "hard" infrastructure investments in the bipartisan plan, which he says will potentially improve "the productive capacity of the economy. " But he sees both short- and long-term problems from the twinned proposals in the Democratic-only budget plan.

From universal pre-K to improved public transit, he argues, under the plan "life gets better along a bunch of dimensions for a lot of low- and median-income families. " So long as Democrats offset most of the new spending with tax revenue, as they've proposed, "from an economic point of view, I'm very unworried about the guns/butter/overheating-type problem" of fueling inflation, he says.

If Democrats later this year can pass even a fraction of the new investment and safety net programs they are proposing -- from universal preschool and tuition-free community college to the huge expansion in tax credits for raising children and paid family leave -- they are certain to provoke years of similar resistance from Republicans.

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